Worried about North Korea? Buy gold

Gold is the equivalent of marmite when it comes to the investment world – but whether you love it or hate it, the yellow metal tends to shine at times when political risk is high.

Take this week for example, and the way financial markets have reacted following US president Donald Trump’s ‘fire and fury’ speech (on 8 August) directed towards North Korea.

Since the speech was made, the S&P 500 is 1.7 per cent in the red, although most of the losses were racked up during last night’s session, with the index slipping 1.4 per cent.  Similarly, the Dow Jones is down 1.2 per cent since 8 August, while the technology-focused Nasdaq composite is down 2.6 per cent.

Rising geopolitical tensions have spilled over onto other markets, including the UK’s FTSE 100 index, which is showing a loss of 3 per cent since 8 August. This morning (11 August), by 10.45am the index was 1.1 per cent in the red, hovering just above the 7300 point mark.

While equity markets have fallen, however, the gold price has risen, and the yellow metal’s spot price has now reached a two-month high, trading at $1,289.

Joshua Mahony, a market analyst at IG, points out that Trump’s confrontational stance with North Korea has ‘raised volatility across the board’, and in turn pushed the VIX index, Wall Street's 'fear gauge', to its highest level in almost a year.

‘The UK headline index (FTSE 100) has crashed to the lowest level since late June, in a week which has turned from mundane to insane,’ adds Mahony.

In the flight to safety investors have turned to gold, and in response the gold price has risen. Mike van Dulken, head of research at Accendo Markets, adds that there’s currently a ‘fresh preference for bonds and gold over equities and metals’.

He adds: ‘Gold has posted fresh two-month highs, extending the bullish flag towards $1,320 that we have been highlighting. Whilst back from overnight highs, support remains valid at $1,284 thanks to geopolitical jitters and a US dollar trading back from August highs.’

As one would expect, gold investors expect further upside for the yellow metal in the event of tensions between the United Stated and North Korea escalating further. But, even though they are talking up their own book, the odds on gold rising would be lower than on it falling.

Joe Foster, a portfolio manager and gold strategist at VanEck, an investment management firm based in New York, says: ‘Gold and gold stocks have shown modest gains this year due in part to global geopolitical concerns. One of the hotspots has been North Korea. Given North Korea’s behaviour historically and the unpredictable nature of both president Trump and supreme leader Kim Jong-Un, we expect gold to gain continued support as a safe-haven store of wealth.

‘If the situation escalates from talk and sabre rattling to open conflict, then we would expect a much stronger reaction in the gold price, as this would likely have a negative impact on global financial markets and economic growth,’ adds Foster.

In the event of a war breaking out it is feasible that institutions will bolster their allocations to gold, agrees Ned Naylor Leyland, who runs the Old Mutual Gold & Silver fund.

According to Leyland, gold is already a core asset class for central banks, the super-rich and what are classified as ‘the global poor.’ He adds that should the North Korea situation develop ‘it may just prove to be the catalyst to push the institutional world to commit flows back to this asset class on a sustained basis.’

Gold: the pros and cons

There are various factors to weigh up when deciding whether to go for gold, but as a rule of thumb it is worth limiting your exposure to only a small part of a diversified portfolio. Both the gold spot price and gold funds, which specialise in buying mining businesses, are notoriously volatile.

On the positive side gold is viewed as the standout safe haven investment. The yellow metal is seen as an insurance policy, due to the fact that it is genuinely uncorrelated to the fortunes of equity markets.

Moreover, as James Luke, manager of the Schrdoer ISF Global Gold fund, points out, gold has also in the past proved its worth as an effective inflation hedge, and given the printing of money by the world’s central banks in the course of quantitative easing programmes, there is every reason to argue that higher inflation is coming in the future.

Against that, one of the main downsides is that gold does not have a yield, nor does it generate cash flow or profit. It is therefore difficult to value. Instead its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile.  

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